The Economics of Climate Change Temperature anomaly
If we continue Business as usual: Alternative theories Friis-Christensen and Lassen (Science, 1991)
The mainstream assessment More recently, a study and review of existing literature published in Nature in September 2006 suggests that the evidence is solidly on the side of solar brightness having relatively little effect on global climate, with little likelihood of significant shifts in solar output over long periods of time. Lockwood and Fröhlich, 2007, find that there "is considerable evidence for solar influence on the Earth s pre industrial climate and the Sun may well have been a factor in post industrial climate change in the first half of the last century," but that "over the past 20 years, all the trends in the Sun that could have had an influence on the Earth s climate have been in the opposite direction to that required to explain the observed rise in global mean temperatures. (Wikipedia) IPCC scenarios Emissions paths and equilibrium temperature Nordhaus DICE model Growth model Detailed and with much empirical content. Environmental quality does not enter the utility function CO 2 reduces economic output, i.e. a damage function Cost of abatement Based on disaggregated underlying studies Regional The dynamic of climate change More detailed than the simple decay function
Valuation problem Prediction above, at 2,5 degree increase 50 millions exposed to hunger 3 billions risk water shortage 300 million risk malaria May result in conflicts over land areas, massive numbers of refugees, war Economic models like DICE state the cost as a monetary value, a prosentage of GDP. Distributional issues The historical emissions caused by rich countries The damages are most felt by the poor
Emissions and population 8,00E+09 7,00E+09 6,00E+09 5,00E+09 4,00E+09 3,00E+09 2,00E+09 1,00E+09 0,00E+00 W o r ld U S A O E C D A s ia P o p u la t io n T o t a l C a r b o n E m is s io n s Main result Optimal carbon price 27 $ / ton carbon in 2010 (7 $/tco 2 ) 90 $ / ton carbon in 2050 (25 $/tco 2 ) 200 $ / ton carbon in 2010 (54 $/tco 2 )
Carbon prices for different strategies Other results from Nordhaus Much emphasis on the distribution of cost Low cost if all face the same carbon price Unequal carbon price highly inefficient Warning agains those who are not willing to increase the carbon price Subsidies will not work Norwegian carbon prices in different application (FIN)
Existing taxes Carbon taxes are not distortionary Income and consumption taxes are distortionary Regulation, free quotas does not raise revenues No income recycling As seen at the seminar: while there may be no double dividend, this income recycling may be important Triple dividends CO 2 abatement also reduces other externalities Eg NOX, particles, noise, congestion from traffic Incentives to innovate Does it pay to develop new technology? The value of a patent to cleaner technolgy What are firms willing to pay to rent the technology? How much does it reduce emission? What are the cost of emitting Depends on taxes or quotaprices Quotas may yield lower incentives. Returning to main results
Global emissions of Industrial CO 2 Atmospheric CO 2 concentration by policy Projected temperature by policy
Per capita consumption Nordhaus versus Stern Norhaus complains that Stern uses results that are biased toward high consequences But the main difference is the interest rate Nordhaus argues that the average return to capital is 6% Is sceptical to ethically based discount rates Stern uses a discount rate of 1.6% Ramsey rule r=ρ+αg Stern uses a logarthmic utility. (α=1) Nordhaus argues that the result is inconsistent with observed return to capital. 3 Runs to assess the Stern Review
Discounting and Stock pollution With constant marginal damage: Carbon price = D (A)/(r+α) Life length of CO2 is more than 200 years, α=0.5% Carbon price with r=1,6% (Stern) versus r=6% (Nordhaus) is very different. Similar discussion between Nordhaus and Cline in the 1990s The discount rate is the core issue in the economics of climate change. Thomas Sterner: Add a growth of marginal damage D (A) due to income growth. An even Sterner review Discounting We have discussed discounting in terms of relative marginal utility. With a growth of 1,4% per year, we are much poorer than those living a 100 years from now. An additional 100 $ is thus more worth to us than to the future generation. The implied discount rate depend on the curvature of the utility function Now to the other side of the choin: returns to investments.
Return to investments If we invest 1 million $ today, what will it be worth 100 years from now: In Treasury Bills: at most 2,7 million $ (1%) In stocks: 2,2 billion $ (historical return, 8%) Why this huge difference? Uncertainty explains some of the difference But not all of it Returns to stock may be lower if we estimate it today.